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FAQ - 12 February 2015

1. Tax consequences of an employee in terms of the Employment Tax Incentive Act

Q: My client has an employment tax incentive (ETI) audit, and I am very concerned about the finding and a possible "loophole”/ area of confusion in the act that is now a reality.

In a nutshell SARS wants to adjust an ETI claimed for an employee because they say the employee was employed before 1 October 2013.

Facts of the situation:

Employee was employed by this employer before 1 October 2013, but he resigned and was re-employed a few months later. There was a break-in employment for a period of two months the employee was however re-employed in the same tax year.

I am confused because the ETI act does not mention anything about "new” employees section 6 only mentions this:

"(e) - was employed by the employer or an associated person on or after 1 October 2013 in respect of employment commencing on or after that date”The National Treasury guide/explanatory notes for the ETI does not mention the situation where employees resign, and returned a few months later. I can’t find any disqualification for this exact situation, i.e. nowhere does it say that an employee is disqualified if that employee has ever worked for that employer previously before 1 October 2013.

This is going to cause some confusion and I am not sure what to do. This problem would flow onto casual employees, temporary or contract employees, seasonal workers etc. Please could I have some assistance?

A: We agree that the current section 6 of the Employment Tax Incentive Act does not prohibit a person who was previously employed before 1 October 2013 and again employed after 1 October 2013 to be a "qualifying employee”. The current wording in section 6(e) is different to the wording in the draft ETI bill which at such time did in fact (see below) restrict the allowance to employees who were employed for the first time at such employer.

Draft Bill wording:

e) In relation to the employer, was not an employee of the employer or an associated institution prior to 1 October 2013.

Current ETI Act wording:

(e) Was employed by the employer or an associated person on or after 1 October 2013 in respect of employment commencing on or after that date; and

2. Can you get a deduction on the rent paid for your temporary residence?

Q: I have a taxpayer who is currently being audited by SARS. He previously resided in Johannesburg and sold his primary residence to move to Cape Town. Whilst his new house in Cape Town was being constructed, he rented out the primary residence in Johannesburg for R 36 000 per month prior to the sale of the property being finalised. He also paid rent on a property he temporarily lived in while in Cape Town during the period that his primary residence in Johannesburg was being sold.

Can the rent paid be claimed as a deduction against the rental income received? SARS is taxing him on the rental income received but is unaware that he also had rental expense during this period.

A: In our view the CPT rental expense is not causally linked to the JHB rental income in that it was not incurred for the proposes of producing rental income, but the income was rather a passive result of the decision to move to CPT. The CPT property was merely leased to provide accommodation while the house was being built.

We are therefore of the view that section 11(a) of the Income Tax Act would not apply to the lease expense of the CPT property.

3. Can PAYE be deducted from an employee with refugee status?

Q: I have a client who is a refugee, that has been supposedly issued with an Income tax reference number and has PAYE deducted every month from his salary. I would like to know if this is according to tax legislation.

A: Foreign persons with valid passport numbers employed in SA can and must also be registered for income tax by an employer on SARS Efiling. A SA ID number is not a requirement in such instance, only when it is a SA citizen. In such instance a country code of where the person is a citizen is also required on registration. Please refer to pg. 8 of the attached guide.

4. Claiming a learnership allowance where the employee leaves a month earlier than the SETA signs off?

Q: A client employs a person in terms of a 4 year learnership. This learnership is for the period 1 March 2011 to 28 February 2015. The learnership has specific requirements which are linked to that of the SETA requirements. Once the employee has met these requirements the employee can choose to leave the client's employment. In this case the person left at the end of January 2015 as his core training requirements were met. The SETA will issue the completion letter on 28 February 2015. Therefore technically the learnership is still effective until 28 February 2015. However there is no employment relationship for the month of February.

Would a company be able to claim the learnership allowance in full where the employee leaves a month earlier (i.e. 11 months) and the SETA only signs off the learnership at the end of the final month (12 months)?

A: In our view the requirement in section 12H (4) of the Income Tax Act, is that the 12 month period must be calculated from the date of commencement, which would coincide with employment. Section 17(2) of the Skills Development Act requires that the learnership agreement must oblige the employer to employ the employee and the employee to work for the employer. In our view both the employment and learnership agreement would terminate in January on resignation of the employee and the 12 months should be calculated as stated to this date and not to February which was the maximum conclusion date.

Disclaimer: Nothing in these queries and answers should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answers, SAIT do not accept any responsibility for consequences of decisions taken based on these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision.

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